Virgin, Qantas Follow Contrasting Courses

It is hard to escape the conclusion that the fortunes of Australia's two major airlines are moving in opposite directions at the moment. While Qantas can only hope it has bottomed out after a traumatic 12 months, Virgin Australia is on the rise as it capitalizes on a successful strategic realignment.

Their contrasting trajectories are highlighted by recent annual earnings reports, which saw Qantas record its first net loss in 17 years and Virgin Australia rebound into the black. While Qantas canceled orders for 35 Boeing 787-9s, Virgin Australia is evaluating an order for either 787s or the AirbusA350. Stark differences can also be seen between the two airlines in their domestic and international strategies.

Virgin Australia CEO John Borghetti views the latest annual results as a vindication of the former low-cost carrier's move to broaden its scope. It has introduced domestic business class to attract corporate and premium traffic, and signed a range of strategic alliances that have boosted its long-haul offerings without expanding its international fleet.

The carrier achieved a net profit of A$22.8 million ($23.5 ﻿million) for the fiscal year through June 30, an improvement of A$90.6 million from the previous year's loss. The first phase of the carrier's realignment brought revenue diversification, and “the next phase will be driving earnings growth, driving good returns” from the changes it has introduced, says Borghetti.

On the international side, Virgin Australia has formed strategic partnerships with Air New Zealand, Delta Air Lines, Singapore Airlines and Etihad Airways. Each arrangement is aimed at providing access to a different international market. The success of this approach is demonstrated by a 158% increase in interline and code-share revenue over the last fiscal year.

In comparison, Qantas's much larger international division lost about A$450 million during the fiscal year. This is partly due to the difficulty in competing against the giant Middle Eastern and Asian airlines with Qantas's own flights (AW&ST Aug. 27, p. 42). It is now following Virgin Australia's example and looking to partner with Emirates or another overseas carrier on some routes.

On the domestic front, both carriers are ramping up capacity in their networks. The domestic market is hot at the moment, and profits in this sector helped Qantas offset its international losses.

Virgin Australia plans to increase domestic capacity by 8-9% in the six months through Dec. 31, its fiscal first half. Qantas, meanwhile, has announced it will increase domestic capacity by 9-11% in the current fiscal year. However, the two carriers differ in their approach to capacity growth. While Qantas is expanding to meet a market-share target, Virgin's Borghetti says he is not interested in setting capacity-share goals and will only add seats where it is profitable to do so.

“The right capacity share is one that gets the best [financial] results” and matches the airline's strategy, says Borghetti. The airline will not be “forgoing pricing for the benefit of capacity.”

Qantas executives admit their own capacity growth will put pressure on yields. They believe, however, that a 65% domestic capacity market share is the appropriate level to maximize profits, so when competitors grow they must do so to maintain that share.

About 80% of Virgin Australia's domestic growth stems from assigning newly delivered Airbus A330-200s to routes between Perth and the eastern cities, replacing Boeing 737-800s. Using widebody aircraft is necessary to “have a competitive product” in this important market, notes Borghetti.

He says overall industry capacity on the busy Melbourne-Sydney route will see a 24% increase in the first half of the 2012-13 fiscal year, but Virgin Australia will account for only three percentage points of that growth.

The carrier expects to have its sixth A330 delivered early next year. Borghetti stresses that if demand falls on any of the domestic routes where the A330s are used, the aircraft could be switched to international routes—although the carrier currently has no plans to do that.

As well as the A330s, Virgin Australia's widebody fleet includes five Boeing 777-300ERs. These are flown on international long-haul routes to Abu Dhabi and Los Angeles, complementing service offered by its partners.

Borghetti says Virgin Australia is evaluating its future widebody needs beyond 2017, with both the Boeing 787 and Airbus A350 “in the mix.” This evaluation is in its preliminary stages, and he expects a decision within the next 12 months.

The airline recently placed a major narrowbody order, comprising 23 737 MAX aircraft for delivery from 2019. Virgin Australia is also taking delivery of 737-800s under an existing order, and it expects to increase its -800 fleet to 68 by June 2013—an uptick of seven during the current fiscal year. This fleet will grow to 76 by June 2015.

While it is receiving 737-800s, the airline is phasing out its -700s. It had seven of these in June, and all but two will have left the fleet by the end of 2012.